What Fintech means to you
How financial technology could change your relationship with banks and brokers over the next 10 years
Editor’s note: This is the second of two articles marking the 10th anniversary of financial technology, or fintech, and discussing innovations that could change how we interact with money. This article is about the growth of decentralized finance (known as “DeFi” for short) and the mainstreaming of alternative investments.
A decade has passed since a burst of innovation began pushing fintech into the mainstream. Banking on a smartphone, sending cash via peer-to-peer payment services and using automated portfolio managers were once exotic, relatively niche services then, but are commonplace today.
What changes will come in the next 10 years? Fasten your seatbelt as we take you on a tour tomorrow.
Wider access to alternative investments
“Alternative” investments – a broad category that includes collectibles such as wine, cars, art, stamps, coins and even baseball cards, as well as real estate, natural resources and infrastructure projects – have become more popular in the past decade, although minimum investment rules have kept many small investors out. on the sidelines.
New fintech firms, by offering the ability to invest in fractional options, can help that investment class become truly mainstream and usher in three changes in how many people invest.
First, direct access to alternative investments is likely to become more common among large financial services firms. Today, investors seeking access to alternatives typically have to open an account with a specialized service such as an art investment platform or real estate crowdfunding firm. Fintech can enable investors to buy and sell options under the same login as their main brokerage account.
Stock tips from a robot
Second, robo-advisors—online-only financial advisory services that manage clients’ investment portfolios with little or no human interaction—may begin incorporating options into their robo-portfolios.
“Options will be part of the standard investor portfolio.”
The wall that currently separates alternative and traditional managed portfolios appears to be collapsing, and automated advisors will encompass the entire investment universe. A sign of this trend is robo-advisor Betterment’s recent acquisition of a crypto portfolio manager.
At the same time, a growing number of jurisdictions are likely to repeal at least some of the rules that determine who qualifies as an “accredited investor” authorized to access certain types of alternative investment products.
Although these rules vary from country to country, they generally require individuals to have a high annual income (in the US, $200,000 for an individual or $300,000 for a couple), a substantial net worth ($1 million, not including primary residence) or a professional certification (such as a Series 7 or Series 65 license).
According to the latest SEC data, approximately 13% of US households in 2016 had someone who qualified as an accredited investor. Critics argue that such rules inappropriately limit access to certain types of products.
Alternative investment boosters expect that over the coming decade, some jurisdictions will lift many of the restrictions (for example, by replacing the net worth requirement with an online financial literacy test) or phase them out entirely.
“The next decade will see alternatives become mainstream.”
“The coming decade will see alternatives go mainstream and (cause) a shift away from the classic sixty/forty investment philosophy,” said Milind Mehere, founder and CEO of YieldStreet, an online marketplace for alternative investments. He was referring to a common strategy of investing 60% of one’s portfolio in stocks and 40% in bonds.
“In 2032,” Mehere added, “I see my personal portfolio as a mix of stocks, alts, cryptos, commodities, cash, taxes and trusts, all delivered in a seamless experience via a super app. Options will be part of the standard investor portfolio.”
DeFi is Small but ready to grow
Outside of the traditional financial industry, advances in crypto-technology are promoting decentralized versions of financial products (known as “DeFi” for short). DeFi protocols such as Aave, Compound and Uniswap use software to provide various financial services – such as lending, trading and insurance – for cryptocurrency users.
DeFi protocols are not like traditional big banks or fintech companies. Instead of leadership from a board and CEO, major changes to DeFi protocols can generally only be made if the majority of the community votes for a change.
DeFi is currently mostly used for transactions performed solely on a blockchain, such as trading cryptocurrencies. Most other financial products need real verification. For example, mortgages require credit checks and income verification, while insurance needs a process to deal with fraud allegations that end up in protracted, multi-year legal battles.
Over the next decade, look for DeFi to become more competitive with traditional financial services. It could go mainstream by improving the overall user experience and blockchain’s ability to work with real-world assets.
Centrifuge, Etherisc, and MakerDAO are three DeFi protocols that are working on projects to bridge the gap between blockchain and the real world, but the total value of assets on DeFi protocols that involve real-world interaction is still relatively small.
Innovation beyond imagination
Over the next decade, however, DeFi advocates expect it to become more competitive with traditional financial services and real-world products—and allow for entirely new ones.
“The real innovation that will benefit consumers over the next decade will not come from dragging legacy business models onto a blockchain, but from the growth of new crypto-native DeFi solutions that can meet your real financial needs,” said Lex Sokolin , the global fintech co-head at ConsenSys, a blockchain software technology company.
“Decentralized finance provides a new, and likely superior, architecture for producing financial products.”
“Just like all previous transitions to new technology, there will undoubtedly be challenges as we explore the frontier,” he added. “But decentralized finance provides a new, and probably superior, architecture for producing financial products.”
Key to success: Simplify
To expand mainstream adoption, DeFi must be easier to use for consumers. Interacting with it today often involves navigating dense financial jargon and a platform that offers few instructions and limited help and lacks features like a detailed trade confirmation screen. Learning how to safely use DeFi products and how to navigate the industry jargon can be very intimidating for crypto newcomers.
As DeFi overcomes these two challenges over the next decade, how will consumers benefit? In developing countries, DeFi can provide billions of people with an independent alternative to institutions run by authoritarian governments (which can seize citizens’ assets without due process), faltering local banks and unstable currencies.
DeFi’s value to people in emerging economies is evident in Chainalysis’ global ranking of cryptocurrency consumer adoption, which is dominated by developing countries.
A change will come
Developed economies generally do not face the same instability challenges. There is a wide range of opinions on how (and how quickly) DeFi will change the developed world over the next decade, but most of the technology pioneers and leaders interviewed for this article agree that it is likely to create innovative financial products and experiences.
“Throughout my career in financial services, I have seen the limitations placed on the industry by legacy rails,” said Jarrett Lilien, president and COO of WisdomTree Investments, a fund management company. “Not unlike the disruptive effect of ETFs on mutual funds, DeFi and blockchain technology are poised to redefine the fundamental infrastructure of financial services – and the industry needs this kind of innovation.”
As an example, Lilien said blockchain could enable people to use gold or US Treasuries the way they now use cash – without having to carry the assets themselves.
The growth of easy-to-use DeFi services over the next decade could create a new type of competition for traditional finance.
What is the future of Fintech?
“A decade from now, if your business doesn’t interact with the DeFi ecosystem — or crypto and blockchain more broadly — your firm won’t be considered a fintech company,” said David Klein, founder and CEO of Commondbond, which funds solar energy projects for consumers and solar installers.
The four trends we’ve discussed—an advanced AI-based assistant, automation of everyday financial needs, alternative investments going mainstream, and competition from DeFi services—represent just the biggest changes facing financial services. Many more are on the way.
The next decade may also see more embedded finance, with retailers and other non-banking companies offering bank-like services such as advanced payment plans; issuance of digital currencies by central banks; and greater integration of public benefits into your financial accounts.
Your relationship with money will evolve with each such change.
“If you consider the first decade of fintech to be fintech 1.0,” said Adam Nash, co-founder and CEO of Daffy, a service that automates charitable giving, “then in the coming decade fintech 2.0 will go beyond making online versions of traditional financial services and towards fundamentally new ways of interacting with your money and finances.”
